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Russia's Half-Open Door: Russia Will Pursue Policies that Encourage Investments by Both Locals and Foreigners, But Expects Reciprocity for Its Own Companies Overseas

In a keynote speech to investors on Friday, Russian Prime Minister Vladimir Putin fell short of breaking new ground regarding ways to improve the country's unfavorable investment climate, which various experts attribute to weak property rights, red tape and corruption. He did, however, put together a credible investment case for Russia by trying to convince investors that Russia has a genuine plan ­ and determination ­ to radically turn its economy around. Putin, who was addressing the 10th annual International Investment Forum in the Black Sea resort of Sochi, reminded participants that the global financial crisis is not over yet and pointed to the continuing volatility in stock markets as evidence.

Attracting and retaining foreign investment remains the cardinal goal of the Russian government, Putin told forum participants. He announced that the heads of leading sovereign wealth and private equity funds will advise the $10 billion Russia Direct Investment Fund, set up to attract foreign investment into Russia. The lineup includes high-flying business executives, like Leon Black, who heads Apollo Global Management, Bader Mohammad Al-Sa'ad of the Kuwait Investment Authority, and Lou Jiwei of the China Investment Corporation.

The Agency for Strategic Initiatives (ASI), a high-power lobby group that Putin created in May, will now lead government efforts to compete with other emerging markets for foreign direct investment, Putin said. The agency's role will include the development of commonly accepted investment standards and frameworks to support investment projects across the regions. "Investors need to know the rules of the game in advance and understand how much support they can count on from both the federal and regional authorities," Putin said. One radical proposal from the prime minister is that the proportion of grants allocated to different regions should henceforth be tied to how congenial their investment climate is.

But while trying to keep the doors wide open to foreign investment, the Russian prime minister also managed to keep investors guessing about his own intentions for 2012. In recent months, a growing chorus of leading experts has been warning that such uncertainty is unnerving investors and that clarity on 2012 polls may be just what is needed to encourage ­ and even embolden ­ foreign investors to put more money into the country's economy. With barely six months to go before the presidential election of 2012, neither prime minister Putin nor incumbent President Dmitry Medvedev has ruled out running, and neither has stated clearly that he will contest.

Whoever takes over the helm of the Kremlin next year will need to reform the bureaucracy, which the Russian Prime Minister said is in need of retraining and better proficiency levels. "Today, one of our key goals is to raise the level of competence for Russian officials and change the philosophy of public service," Putin said. "We intend to bring into the government, the economy, politics and social services new people who have already proven that they can go along in a constructive way during the transition and are willing to work for the benefit of the citizens and the country."

What the government would not do next year, however, is raise taxes, Putin said. The prime minister distanced himself from Tuesday's statements by his deputy, Finance Minister Alexei Kudrin, to the effect that Russia's next government will have to raise taxes to make its public finances strong enough to absorb the shock of a possible oil price collapse. Putin said it would be unfair for the government to place an extra burden on people and businesses. He called instead for improved efficiency and effectiveness of public spending. "We need to improve the administration and increase the efficiency of budgetary expenditures," Putin said.

In a thinly veiled sales pitch for investment, Putin told the plenary gathering that Russian state-owned companies have put in motion the Strategy 2020, expected to spur innovative development in Russia. Next year, Russian companies will together be spending 700 billion rubles ($22.9 billion) on scientific research and development and technologically advanced products, Putin said, and added that the amount will gradually double.

However, Russia needs trust and reciprocity embedded in the investment game with foreign players, Putin hinted. Russian companies must set their eyes on foreign assets now that many have more spare money to invest, he said, adding that the government is ready to assist them to make foreign acquisitions. Many countries are not ready to receive Russian investors with open arms, Putin said. He recounted his experience over the failed deal to buy Opel's European unit from American General Motors by Russia's Sberbank in 2009: "I have even met with [their] trade unions, signed the papers ­ we had no intention of taking away the technology ­ yet the deal fell through anyway."

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